Broadcom Acquisition of Symantec – High Potential for Synergy upside

Broadcom acquisition of Symantec

In this blog, we will analyze the Broadcom acquisition of Symantec for $10.7 Billion and predict whether this transaction would increase the shareholder value.
We will further decide on the rationale behind the acquisition, valuation multiples and how the market has reacted to this acquisition.
Finally we will take a stab on the current P/E ratio of Broadcom and conclude if this acquisition would be EPS accretive or dilutive for Broadcom.

Broadcom acquisition of Symantec – Deal overview

  1. Broadcom acquisition of Enterprise Security business of Symantec is the validation of the firm’s growth strategy to diversify from its existing semiconductor business and move to highly profitable software business segment.

Weakness in Semiconductor industry

  1. Broadcom has primarily been an acquisitive company and is a leading player in semiconductor space.
  2. The semiconductor industry has become commoditized and fragmented.Due to the low potential for growth, there is consolidation happening in this industry.
  3. Due to stricter CFIUS practices and antitrust norms, Broadcom is finding difficult to acquire US based semiconductor companies.Its attempt to acquire Qualcomm was blocked by the government on the premise of internal security.Hence Broadcom felt that it needs to enter into a fast growing market like Software to fuel its stagnant growth and return back money to shareholders.

Impact of US China Trade war

  1. Apart from the decline in semiconductor industry, the US China trade war has further affected Broadcom business.
  2. Huawei is a big customer to Broadcom and the recent sanctions imposed on Huawei by the Trump government has affected the revenues of Broadcom.

Customer Concentration risk

  1. About 25% of Broadcom revenues come from Apple iphones.
  2. The smartphones industry itself is getting stagnant and facing issues in growth.
  3. Apple revenues growth from smartphones segment is also declining.This would further impact Broadcom revenues in future.

Hence Broadcom decided to diversify its business from semiconductor industry to high growth software market.

Broadcom Acquisition of Symantec – Deal strategy

  1. Broadcom acquisition strategy in Software business was simple. It wanted to acquire large enterprise companies which have become cash cows.
  2. These target would have large customer relationships and have bloated cost structures.
  3. Broadcom would leverage these customer relationships to cross sell its semiconductor offerings.
  4. Further it will add value through cost synergies by rationalizing headcount and moving all administrative expenses to Broadcom platform.
  5. Broadcom first target in Enterprise infrastructure software segment was Brocade which was followed by CA Associates last year.
  6. Its integration strategy was simple – No focus on acquiring new customers and allocate sales/account management only to high priority accounts that exhibit high profitability.
  7. Further, it exited all low margin business of its targets by divestitures or outsourcing these services to its preferred suppliers.
  8. This strategy helped it to maintain the target revenues and improve its EBITDA. Any increase in free cash flows was shared with its shareholders.

Transaction structure

  1. Broadcom acquired Symantec security business for $10.7B in all cash deal.
  2. The revenue multiple was 4X and EBITDA multiple was 30x.The Symantec acquisition will add close to $2.5B in topline and $350M in EBITDA.
  3. This acquisition will increase the Broadcom software business contribution from 20% to 30% of the overall business.
  4. Broadcom is expected to fund this acquisition by taking external debt.
  5. Broadcom is planning to return 50% of the free cash flows from this acquisition back to shareholder as dividends payments and remaining 50% will be used to pay the interest payments on the debt.

Synergies from this deal

  1. Broadcom is mainly looking at cost synergies by rationalizing the workforce and focusing on developing only the high growing segments of Symantec business.
  2. Broadcom decided to focus only on Endpoint, Web security and Cloud security business of Symantec as these business are growing and have huge demand.Further Symantec continues to be the market leader in this business.
  3. Broadcom is looking to achieve $1B in cost synergies through this transaction.
  4. The enterprise customer base of Symantec will be used to cross sell Broadcom other business offerings thus looking to focus on adding revenues outside of software segment.

How does this transaction affect Symantec

  1. Symantec as part of this transaction will divest its enterprise business and its name to Broadcom.
  2. The enterprise business was contributing 50% of Symantec revenues but only 10% of operating income.This is due to high R&D expenses incurred by Symantec for its enterprise business.
  3. Post this acquisition, Symantec will focus only on consumer business.
  4. Symantec will return $12/share as special dividend to its shareholders and will spend $1.6B in share buybacks.
  5. Symantec will look to improve its operating efficiency and focus on coming up with high value added products to consumers.

Broadcom acquisition of symantec – Accretion/Dilution Analysis

  1. Broadcom has a successful track record in acquisitions. It was able to achieve cost synergies that was planned for CA transaction.
  2. Hence the investors are confident that Broadcom can achieve the costs synergies targets of $1B.In an acquisition, Cost synergies are much easier to achieve and is in control of the acquirer contrary to Revenues synergies which is dependent on the combined value proposition and on customer willingness to buy the offerings.
  3. If Broadcom manages to achieve its $1B costs synergies target, then it achieve an EPS accretion of $1.8 which reduces its P/E ratio from 11.3 to 8.4
  4. If Broadcom manages to achieve the guidance, then it can also be able to return back its debt.

Conclusion

  1. There is plenty of value to be unlocked with Broadcom acquisition of Symantec. After its success in CA acquisition, investors are confident and optimistic about this deal.
  2. If management achieves its synergy targets, the company would be trading at an implied 8.4x multiple, which I think undervalues the business, especially with the greater software contribution(Software contributes 30% of the total revenues)


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